What is position trading?
Position trading offers the opportunity to make gains, but make sure you do your research
Position trading is a long-term trading strategy that seeks to capitalise on trends in the market. As the intention is not to trade actively, position trading can be considered the closest rung on the ladder to a true ‘buy and hold’ investment strategy.
Position traders identify and buy stocks they can keep for weeks, months or even years. The difference between position trading and investing is that while investors are looking to sit on a stock indefinitely, position traders will periodically assess their purchases, and sell if the overall momentum appears to have halted. Unlike day traders or scalpers, position traders may not be troubled by the small downward corrections frequently encountered along the way, but they do keep a watchful eye on the overall trend of their stock.
Position trading may seem to be the polar opposite of day trading, but in fact the two strategies do share some similarities. Both styles are focused on identifying patterns and trends in a stock, the difference between them being the time period considered.
Position traders tend to enjoy the thorough macro-level research required to identify picks and gain satisfaction from spotting trends in the market. The strategy inherently requires less minute-by-minute monitoring than faster-paced strategies such as day trading, but the initial research used to identify picks is critical to its success.
Position trading pros
Position trading is a common introductory strategy as it has the potential for significant gains without requiring the constant attention required for other strategies such as day trading. Some of the potential advantages are:
- Low transaction fees: Most trading platforms charge a per-trade transaction fee. Position trading by definition requires infrequent trades and this will reduce the overall amount spent. Being able to prevent long-term returns eroding through constant transaction fees makes position trading attractive.
- Smaller time commitment: Position trading does require significant up-front research, but this can fit around your schedule, according to a time frame you can commit to. Positions should be monitored regularly but do not require the constant attention to minor fluctuations needed for day trading. Periodic adjustments of stop-loss positions can mitigate monitoring requirement.
- Less-noise: Position traders seek to identify overall trends in the market and to capitalise on the inevitable shifts in the economy. Position traders don’t need to be hung up on every statistic from every company and can instead focus on the big picture.
Position trading cons
Position trading does offer the opportunity to make significant gains, however there are factors to consider before adopting this strategy. Some of the possible drawbacks to position trading are:
- Trend reversal: A major concern for a position trader is that minor fluctuations in the price of a security can be indications of a major price correction or reversal. Although position traders benefit from less-frequent monitoring of small price changes, attention should remain focussed on identifying possible momentum shifts.
- Low liquidity: Position traders typically have a large proportion of their investments tied up in strategic purchases. This means keeping a significant amount of their capital invested most of the time.
- Opportunity cost: Position trading is best-suited to people looking to grow their assets over a long period. Day traders accustomed to frequently identifying new opportunities may be discouraged by the lack of available capital for new opportunities when position trading.
Is position trading for you?
When deciding if position trading strategies are right for you, there are several factors you need to consider. The most important of these are:
The size of your portfolio: It can take a long time to realise gains and, because of this, position trading is best suited to traders with larger portfolios. Your individual financial situation should be considered.
The amount of time you can spend on your account: Position trading requires significantly less time commitment and attention than day trading, but it still requires more than that required for a buy-and-hold investment strategy.
How quickly you need to capitalise on gains: Position trading requires that you commit funds to long-term growth.
Your individual risk tolerance: As every trade inevitably carries risk, position traders reduce their risk by making fewer trades. The potential for loss is still present, but the risk of a sudden loss is reduced by performing initial research that’s thorough.
Prevailing market conditions: Position trading is best suited to a bullish market as the individual success of securities is affected, in part, by the overall movement of the market. Prevailing bearish or stagnant market conditions are not beneficial to a position trader as they will not have the flexibility to capitalise on fluctuations in security price.
No single trading strategy is necessarily better than another and there is no magic answer to the question of which is the best option for you. It comes down to thinking about your individual requirements and the various factors involved. There is always the option of blending strategies or transitioning from one to another over time. The best policy is to spend time considering your personal aims before choosing the strategy with which they best align.